Britain’s banks face a new, £200 million bill for mis-selling after the Financial Services Authority today fined the country’s biggest provider of card and identity theft insurance a record £10.5 million.

CPP mis-sold its two main UK products to 4.4 million people for six years up to March 2011. It has agreed to pay some 300,000 people to whom it sold directly about £14.5 million in compensation.

The compensation bill for the remaining 4.1 million customers who were introduced to CPP by card issuers including Royal Bank of Scotland, Santander, HSBC and Barclays will be met by these banks and could reach £200 million.

The banks and CPP are still negotiating with the FSA over how they will settle the majority of the mis-selling claims and how much it will cost.

Santander last month said it had included a provision for card protection mis-selling among total “redress” provisions of £232 million in its third quarter.

Most of CPP’s sales were based on the stickers which were put on new credit or debit cards telling customers to ring a number to “activate” the card or confirm delivery. These went through to CPP call centres where staff then tried to sell them card protection and identity protection.

The FSA said that the call centre staff were “over persistent” and used scripts which not only misled customers but also outrightly lied.

In one case the script said identity theft had “risen 40% in the last year” when in fact industry data showed it had risen 1%.

Tracey McDermott, head of enforcement and financial crime at the FSA, said: “This is a serious case, one that has warranted our joint largest retail conduct fine and generated a sizeable bill for consumer redress.”